Building centralized products with tokens

Startups from that category are often building “company-specific coins”. Company-specific coins are what some might call apptokens or appcoins. Regardless of their name, company-specific coins can only be used at the company issuing them.

Savedroid: Savedroid is a Germany-based savings and investing app. Several cryptocurrencies and products should be purchasable through the app. savedroid is not taking full advantage of blockchain technology, their only blockchain-related advantage stems from having a cryptocurrency.

Hydrominer: Hydrominer is an Austrian-based crypto mining company. Similar to savedroid, Hydrominer’s only blockchain relation is having a token.

In both cases, the tokens are intended to be payments systems for the services and products issued by the companies.

Such company-specific payment systems make, in general, sense. Loyalty points, vouchers, or pre-paid cards are existing, well-functioning company-specific payment systems. Pre-paid cards at Starbucks and Co. are a great way for companies to retain customers, and for customers to receive rewards.

With, for instance, savedroid’s token – SVD – something similar is going on: savedroid can retain customers (somebody who owns SVDs will want to spend them on savedroid). Customers can get rewarded through potential gains (selling SVDs when the price goes up).

New user behavior: Tokenized startups are experimenting with new type of money: Knowing that getting people to switch from cash to contactless payment is an extremely slow process, how can we expect that people will switch to cryptocurrencies almost instantly as implied by many startups?

Experimenting with the industry: the industry is still refining the crypto funding process (e.g. DAICOs, SAFTS, ILPs, AirDrops), crypto regulations across countries are still unclear, and the “codebase“ is still in development (think forks or missing consensus over consensus algos)

Experimenting with economics and market behavior: how will token value, spending, and saving correlate? (e.g. if people expect a token to rise in value will they spend it?). Furthermore, prices of tradable assets are volatile; what happens if the token’s value fall? How will customers react if the 100€ they spent on SVDs is worth only 50€? For sure, services within the app can be denominated in token amount (so that regardless of what, for instance, 100 tokens are worth on the market, they are always worth „100“ within the app) or their value can be stabilized (think stablecoins).However, such adaptions lower the potential for financial rewards through trading and thus rendering those tokens’ rewards non-existent.

Nevertheless, over time we might overcome all these hurdles; the tech will be ready for mass applications, people will use cryptocurrencies with ease, and financial/utility rewards have reached an equilibrium. However, The following questions remain:

Cryptographic currency or virtual currency

Company-specific or agnostic currency

Cryptographic currency or virtual currency

If a company-specific payment system is needed, why must it be a company-specific cryptographic currency and not a „virtual“ currency (loyalty points, in-game credits and similar)? One could argue because there is no „centralized point of failure“; a currency from company x will be worthless when company x goes bankrupt. However, if the only entity that accepts that specific currency, does not accept it anymore because it is bankrupt, it matters little how it was issued. That would be the case with savedroid, Hydrominer and Co. If they go bankrupt, their tokens become useless because they are the only acceptance points. In contrast, if one acceptance point of Bitcoin, Euro or any other universal currency goes bankrupt the currency can still be used at other points.

Company-specific or agnostic currency

If we need a company-specific payment system, why must it be a company-specific currency? If the whole industry follows suit and every company (and maybe country) has their own currency, we will end up in a highly fragmented „currency market“; users will need a separate currency for each application. It needs little explaining that such a scenario won’t last long. Eventually, a universal currency (like the Euro in the EU) or payment system (like PayPal) will commoditize the currency away.

Appcoins must provide product reward instead of financial reward by being tied to blockchain

The answer to both questions is simple: the currency’s technical design must be achievable exclusively through cryptographic assets which in turn must be tied to blockchain. If the currency is used for a fully decentralized and possibly open source system, the single point of failure like in savedroid, Hydrominer, and Co. is removed or at least mitigated.

Furthermore, if the project at hand really justifies a blockchain/token and the token’s functionality is highly specialized and project-specific, it cannot be commoditized away, it will stand as an „independent“ unit. However, if the token’s features are a mere commodity – like paying – there is little justification for its existence.

Finally, this also implies that an appcoins’ reward cannot be financial, i.e. its reward cannot be the expectancy of an increase in value. If the token can only be used for a product, that token’s value correlates with product usage; the more the product is used the more the token rises in value. However, if people hold the token instead of spending it on the product, the product remains unused and the token becomes useless. In contrast, the reward must come from the underlying product; if people like the product they will use the coin and the reward be a „product reward“ stemming from whatever the product offers.

Whether they gain financially won’t matter because that’s not what the token should provide (and probably couldn’t), the token should provide access to a unique offering. If they want a financial reward, they will invest otherwise.